The price of oil is notoriously fickle. We’ve seen the worst of that over the last two years – and you could even say in the last three months.
Prices dropped from $38 per boe in early January to $28 by the middle of the month, and since then have risen to around $42.
On the surface, perhaps it doesn’t sound like much, but that’s a decline of 26% followed by an upswing of 50% in a relatively short timeframe.
But many operators won’t have felt the full force of this shakiness or, indeed, the plunge in the commodity price we’ve witnessed since about June 2014. They’ve placed their bets some time ago through hedging products, fixing the price at which they sell oil and gas for months, and even years, in advance.
Particularly popular with listed businesses, taking this step provides a certain amount of stability and business continuity in an unpredictable industry. Many will still be trading oil north of $60 per boe – nearly 50% higher than its current price.
That’s all about to change.
As we move further into the year, more companies’ hedging positions will start to unwind and they may be exposed to sub-$40 oil for the first time. Further hedges can be taken out, but it’s highly unlikely they’ll be anywhere near the current terms enjoyed by many operators.
Some might be tempted to think this could herald a swathe of insolvencies, with creditors pushing upstream oil and gas companies into financial trouble – but I have my doubts.
Financiers and creditors alike will be keen to keep these businesses afloat, with the spectre of decommissioning costs on the horizon. There has to be a very good reason to appoint an administrator and, most importantly, it has to make financial sense.
With many assets approaching the end of their life spans, banks and other financial backers won’t want to see significant amounts of the remaining resources at an operator used to cover any underfunded decommissioning security agreements or similar liabilities. They want to know they’ll see some, if not all, of the money invested in a company returned.
While this will ward off the threat of insolvency to a certain degree, it will also create an opportunity for strong businesses – a fact demonstrated by the recent cases of First Oil and Iona. Both companies were broken up, with productive assets sold or transferred to other exploration and production (E&P) businesses.
If these deals show anything, it’s that there are still good assets available in the North Sea and buyers remain interested in what the basin has to offer.
They also demonstrate the wave of consolidation which is likely to characterise the industry in the months ahead. Businesses may not be forced into insolvency, but they will probably have to place assets on the market as pressure on balance sheets forces them to put infrastructure, fields, or even themselves, up for sale.
In some cases, where the portfolio of assets is strong enough, we could even see interest from oil and gas majors; who, until now, have mostly been winding down their positions in the North Sea.
Times have been tough on the UKCS, and it could get tougher for many. However, opportunities are still out there for those who have set out their stall for the long haul and have an appetite for acquisitions – it could soon be time to take them.
Addi Shamash is a partner at law firm HBJ Gateley
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